The expectations of investors can vary depending on current market environments.
This can be best illustrated in my own experience when meeting with new clients to evaluate their needs and expectations. Humorously, most new clients always say the same thing when asked what they would like the portfolio to accomplish. “I want to take some risk and hopefully make money but don’t want to lose any”.
This can be summed up by saying they want to establish a conservative defense while maintaining a strong offense. Although a football team can do this, in investing, the posture is either conservative, moderate, and aggressive (with varying degrees in between of course). It cannot be both. One can adopt a different stance with different accounts. For example, having a ROTH in an aggressive stance (because of the tax structures of a ROTH) and having a trust or other IRA type account in a conservative posture.
Which strategy is used in each account has to do with the type of account and the risk tolerance and expectations of the investor when it comes to each account.
Expectations can also change in different market environments and it’s this type of change that can present challenges to professional money managers. For instance, in rallying markets, investors usually catch the greed bug and will call their advisors wanting to go more aggressive. Basically they watched the evening news and see the markets rally and want more profits. FOMO is the term professionals use to describe this posture (Fear of missing out). Advisors can lose clients in this scenario if the client thinks he or she is not making enough.
In falling markets, however, the investor presents another side of himself and hence another problem for the advisor. When markets crater, the investor will get scared and want to go more conservative or just get out of stocks altogether. The Greed bug has now been replaced by panic mode. Now the investor is no longer worried about the return on his money, but only the return of it.
It is for this reason, insuring a good match between the investor and the advisor is an important aspect when selecting both the advisor and the client.
Although investors select advisors as a common occurrence, the advisor should also be selective in choosing his clients. Although most advisors will take all clients because the more money an advisor has under their management, the more money the advisor makes, it is in my opinion that advisors should not just take all clients that come to them. Instead, they should consider carefully the attention a particular client might require, and if the client also has reasonable expectations and a reasonable understanding of what it means to be “invested in the markets”. Those advisors not using discretion in their client acceptance methodology could find themselves in multiple phone conversations or meetings trying to explain strategies and market realities a little bit more often than they prefer.
Investors should also decide if they want to stay in the markets no matter what happens. Although many advisors use the term “in it for the long term” and never consider selling no matter what the market does, this strategy may cause issues for clients as markets drop over a prolonged period of time.
I find many investors think they can weather market downturns, but during severe and prolonged crashes, almost all investors will start to panic and think about getting out of at least some of their positions.
I am of the opinion a “stop out” point should be put in place by the advisor for a last-ditch effort at hopefully limiting losses. After all, although markets tend to drift higher over time, no one can guarantee at some point it might not recover, or at the minimum, take years to do so.
The idea might seem ludicrous to some, but guaranteeing market performance in any direction is not only foolhardy, it’s illegal for an advisor to do so.
In conclusion, evaluating expectations as to portfolio performance will go a long way in addressing an investor’s greed and panic moments, and it would prudent to spend a considerable amount of time going over what is expected in a portfolio before committing any funds into the stock market.
Opinions expressed here are those of Mr. Cuniberti and not those of any bank or investment advisory firm. Nothing stated is meant to insure a guarantee, or to be construed as investment advice. Neither Money Management Radio (“Money Matters”) receive, control, access or monitor client funds, accounts, or portfolios. For a list of the services offered by Mr. Cuniberti, call (530)559-1214. California Insurance License #0L34249 and Medicare Agent approved. Insurance services offered independently through Marc Cuniberti and not affiliated with any RIA firm or entity. Email: email@example.com.